Consolidated Financial Statements

1. Types of investment
2. Principles for Consolidation
3. Consolidated SOFP
3. Accounting for Associate.

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 1. Types of investment
Subsidiary Associate Trade investment
A subsidiary is an An Associate is an A trade investment is
entity that is entity over which a simple investment
controlled by the investor has in the shares of
another entity. significant another entity that is
influence. technical not an associate or a
subsidiary.

Investors's accounting
Dr Investment ( SOFP)/ Cr Bank
Dividends received:
Dr Cash / Cr Investment income (SOPL)
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Consolidated FSs ? 2
 Subsidiary
A subsidiary is an entity that is controlled by another entity.
Control: the power to govern the financial and operating
policies of an entity so as to obtain benefits from its activities.

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 An Associate
An entity over which the investor has significant influence.
Significant influence is the power to participate in the financial
and operating policy decisions of the investee but is not control
or joint control over those policies. This could be shown by:
(a) Representation on the board of directors
(b) Participation in policy-making processes
(c) Material transactions between the entity and Investee
(d) Interchange of managerial personnel
(e) Provision of essential technical
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 2. Accounting for Consolidation
Parent: An entity that controls one or more entities.
A Group consists of a Parent and all its subsidiaries controlled by the
parent.
Group financial statements: are issued to the shareholders of the
parent only, in addition to the parent's own financial statements. They
show the group as a single entity.

Principles for Consolidation:

 Consolidation means adding together (uncancelled items)
 Consolidation means cancellation of like- items internal to the Group
 Consolidation as if you own everything then show the extent to which
you do not own.
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 Note:
- Fair value: In order for the goodwill figure to be accurately
measured, both the consideration transferred and the fair value
ofthe assets acquired and liabilities assumed must be recognised at
fair value at the date of acquisition.
- Mid year acquisition: If a P purchases a S during the year, for
consolidation purpose, it will be necessary to distinguish:
• S's Profit earned before acquisition --> calculation of goodwill
• S'sProfit earned after acquisition --> calculation of retained
earnings of group. We always assume that the Sub’s profits accrue
evenly
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over the year.
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 Consolidated SOFP
1. Establish the group structure (W1)

2. Calculate the net assets of subsidiary (W2)

3. Calculate the goodwill on acquisition (W3)

4. Calculate the non-controlling interests (NCI) (W4)

5. Calculate the group retained earnings (W5)

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 Working 1 – Establish the group structure
P

Date of
Acquisition 80%

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 Working 2 – Net assets of subsidiary

Acquisition date Reporting date

$ $

Share capital X X
Share premium X X
Revaluation reserve X X
Retained earnings X X
Fair value adjustment – land
and buildings X X
X X
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 Calculate Goodwill
 Goodwill is the difference between the fair value of
consideration paid to acquire control of a subsidiary and
the fair value of the net assets acquired
 It represents the premium paid over and above the value
of the assets in the business and represents factors such
as the company reputation
 IFRS 3 Business Combinations requires that goodwill is
capitalised as a non-current asset in the consolidated
statement of financial position and is subject to an
annual impairment review

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 Working 3 - Goodwill
Goodwill $
Consideration transfer X
(FV of consideration paid
or FV of shares issued by
parent)
FV of NCI at acquisition X
X
Less: FV of net assets at
acquisition (W2) (X)
Goodwill on acquisition X

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 Working 4 - Non-controlling interests (NCI)
The non-controlling interest is the equity in a subsidiary not
attributable, directly or indirectly, to a parent. It represents the
shareholders that are not part of the group: e.g. parent owns 80% of a
subsidiary’s shares and therefore 20% is owned by NCI’s

Method 1. Proportionate rate

NCI should be valued at a proportionate share of the identifiable net
assets of the subsidiary. Do not recognise any goodwill for the NCI in
the consolidated statement of financial position.
Method 2. Fair value
Recognise the goodwill attributable to the NCI in the consolidated
statement of financial position, as at the date of acquisition. This
goodwill cannot subsequently be re-valued, unless there is impairment
and the goodwill should then be written down in value. This method of
accounting for NCI is called the ‘fair value’ method.
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 Working 4 – NCI ( FV method)
Non-controlling interest $

FV of NCI at acquisition (W3) X

NCI share of post-acquisition
reserves (W2) X

NCI at reporting date (SOFP) X

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 Working 5 - Group retained earnings
Some of the retained earnings of the subsidiary may
have been earned before it was acquired by the parent company
– they are referred to as pre-acquisition reserves. Therefore a
working is required to calculate retained earnings attributable to
the parent from the date control was acquired

Retained earnings $
100% of the parent’s retained
earnings X
Parent’s share of the
subsidiary’s post acq retained
earnings X
X
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 Reserves – pre and post acquisition reserves
 These are reserves that exist in a subsidiary company at
the date that it is acquired, these reserves are capitalised
and included in the goodwill calculation.
 Profits earned by the subsidiary after the date of
acquisition are called ‘post-acquisition’ reserves, these are
included in the group retained earnings calculation

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 Intra-group balances
 Intra group balances occur when the parent and subsidiary
trade with each other or there are intra group loans
between the two companies
 If this is the case adjust the face of the SOFP to remove
both the loan asset and loan liability
 If the current account balances disagree, it is most likely
to be due to cash in transit or goods in transit.

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 Provisions for unrealised profits
 The parent or subsidiary may sell goods to each
other, resulting in a profit being as recorded in the
selling company’s financial statements
 If these goods are still held by the purchasing
company at the year-end, the goods have not been
sold outside the group
 The profit is therefore unrealised and from the
group’s perspective should be removed from the
consolidated financial statements
 An adjustment is also required to ensure that
inventory is stated at the cost to the group
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 Consolidated statement of profit or loss and other
comprehensive income
 The consolidated statement of profit or loss and other
comprehensive income is prepared by adding together
the parents and subsidiary’s income and expenses
line-by-line from revenue down to profit after tax
 This will give us the profit after tax generated from the
resources under the group’s control
 The parent’s and non-controlling interest’s share of the
profit after tax is shown in a note beneath the
statement of profit or loss and other comprehensive
income
 If there is a mid-year acquisition, account only for the
19 post-acquisition income and expense of the subsidiary

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 Intra group items
Intra – group trading Intra – group interest
Any sales from the parent to  Any intra-group interest
the subsidiary and vice must be eliminated from
versa needs to be cancelled interest receivable and
out as follows: interest payable.
DR Revenue
CR Cost of sales
with the value of inter-
company sales

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 Inter-company trade and
unrealised profit
 When dealing with intercompany trade, the whole
amount is deducted from both sales and purchases
(cost of sales)
 However if some of this inventory remains unsold at
the year end an adjustment needs to be made for
unrealised profit
 The provision for unrealised profit is calculated in the
same way for both the statement of profit or loss and
the statement of financial position
 The effect on profit or loss for the period is that the
cost of sales will increase with the reduction in value
21 of the closing inventory

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Accounting for Associate

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 IAS 28 Investment in Associates
An associate is an entity over which the group exerts
significant influence but not control. A holding of 20% to
50% usually indicates significant influence
An associate is neither a parent nor a subsidiary, it is not
part of the group. Instead the group has an investment in
the associate. The group structure would be:

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 Group accounts - Associates
 In the group accounts, we use a technique called equity
accounting to account for an associate
 Only include the group share of the associates net assets in
the group statement of financial position as a one-line entry
within non-current assets
Investment in associate within non-current assets: this is
the group share of the associates net assets at the statement of
financial position date
Group reserves: include the parent share of the
associates post-acquisition reserves (calculated in the same way
as for a subsidiary)
 In the group statement of profit or loss include only the group
share of the associates profit after tax for the year in arriving at
the consolidated profit before tax.
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 Q: Which of the following statements apply when producing a
consolidated statement of financial position?
 (i) All intra-group balances should be eliminated.
 (ii) Intra-group profit in year-end inventory should be
eliminated.
 (iii) Closing inventory held by subsidiaries needs to be
included at fair value.
A. (i) only
B. iii) only
C.(i) and (ii) only
D. (i), (ii) and (iii)
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 Q: Apple Co has a 45% shareholding in each of the following
three companies.
(i) Pear Co: Apple Co has the right to appoint or remove a
majority of the directors of Pear Co.
(ii) Cherry Co: Apple Co has more than half the voting rights
in Duck Co as a result of an agreement with other investors.
(iii) Orange Co: Apple Co has the power to govern the
financial and operating policies of Orange Co.
Which of these companies are subsidiaries of Apple Co for
financial reporting purposes?
A. Pear Co and Cherry Co only
B. Pear Co and Orange Co only
C. Cherry Co and Orange Co only
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D. Pear Co, Cherry Co and Orange Co
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 QWhich of the following statements regarding the
method of consolidation is true?
 (1) Subsidiaries are consolidated in full
 (2) Associates are equity accounted
A. Neither statement
B. Statement (1) only
C. Statement (2) only
D. Both statements

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Sonia purchased 80% of Catio’s equity on 1 January 20X1.
Which of the following statements concerning the non-
controlling interest (NCI) is/are correct?
(i) NCI describes shares in the consolidated entry not held by
the parent
(ii) NCI describes shares in the subsidiary not held by the
parent
(iii) 20% of Sonia’s consolidated retained earnings will be
allocated to the NCI
(iv) 20% of Catio’s profit after tax will be allocated to the NCI
A. (i) and (iii)
B. (ii) and (iv)
C. (ii) only
D. (iv) only
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 Which of the following statements relating to parent companies
and subsidiaries are correct?
(1) A parent company could consolidate a company in which it
holds less than 50% of the ordinary share capital in certain
circumstances.
(2) Goodwill on consolidation will appear as an item in the parent
company’s individual balance sheet.
(3) A subsidiary may be excluded from consolidation if it has not
previously been consolidated and the parent’s investment in it is
held for resale in the near future.
A. (1) and (2)
B. (2) and (3)
C. (1) and (3)
D. Only (1)
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